Thursday, October 2, 2014

I wrote in a recent
column in the New York Times that tuition at public colleges has doubled over the past 25 years
but that, paradoxically, per-student revenue has
been flat. The explanation? State support for public colleges has
plummeted, leaving colleges increasingly dependent on tuition to fill the revenue
gap.

All of the figures discussed in the column were adjusted for
inflation. The most common statistic used to adjust for inflation is the Consumer Price Index (CPI), calculated by
the Bureau of Labor Statistics. As noted by a commenter
at the Upshot, the report I cited for trends in college revenues did not
use the CPI but rather an index developed by the State
Higher Education Executive Officers (SHEEO), an association of public
colleges. Is this price index a biased
measure that inaccurately portrays revenue trends for public colleges?

To cut to the chase: the trends are unchanged if we use CPI
to adjust for changing prices between 1988 and 2013. Revenues at public
colleges have risen little, their net tuition revenue has more than doubled,
and state support has sunk.

Why does the association of public colleges use a
specialized index? The Higher Education Cost Adjustment, or HECA, is intended
to track changes in the costs of inputs purchased by colleges, while the CPI
tracks changes in the costs of items purchased by households. Since colleges
and consumers buy different things, the CPI and HECA weight their prices
differently.

Colleges are more labor intensive than other industries, so the
HECA puts a heavier weight on employment costs than the CPI, with three-quarters
of the HECA index going to the Employment Cost Index
and a quarter to the Gross Domestic
Product Implicit Price Deflator. Both of these indices are calculated by federal
agencies - the Bureau of Labor Statistics and Bureau
of Economic Analysis, respectively. This was a good choice on SHEEO’s part
– it’s better to have a third party calculating the index so as to avoid the
temptation of manipulating the statistics for self-serving purposes.

When wages go up faster than inflation, the HECA goes up
faster than the CPI, since it weighs labor costs more heavily than the CPI. But
since wages for most workers have been flat for decades, differences between
the CPI and the HECA are small. The online CPI calculator tells us that
a consumer in 2013 needs $1.97 to buy what she could have bought for a dollar
in 1988. The HECA index says that a college in 2013 needs $2.12 to buy the
inputs it could have bought for a dollar in 1988.

How do the different price indices affect our conclusions
about stagnant college revenue and spiraling tuition prices? Not much. According
to the HECA, public colleges are getting just about the same revenue per
student in 2013 ($11,500) as in 1998 ($11,300). According to the CPI, colleges were
only getting $10,500 in 1988, so it’s a bigger jump to $11,500. Put
differently, the CPI says the revenue of public colleges has increased by 8%
over the last quarter century, while the HECA says it’s 2%. And the two indices
agree that state support for public colleges has plummeted, while tuition
revenue has doubled. The index might
differ, but the story remains the same.